The Tax Cuts and Jobs Act introduced us to the Opportunity Zones program in late 2017. The program is still functioning until December 2026 unless Congress passes an extension. There are two certified Opportunity Zones on Kauai. One zone is on Kauai’s South Shore including the private Kukui’ula resort community and oceanfront Lawai Road, and the other is on Kauai’s North Shore, including Hanalei and Ha’ena, encompassing some of the most beautiful real estate in the world.
Kauai’s South Shore, June 2023
An Example of the Act’s Opportunity Zones Program Application
The tax benefits are for those individuals who invest through a Qualified Opportunity Fund (QOF), an entity such as a corporation or partnership specifically created to invest in real estate in a Qualified Opportunity Zone (QOZ). The QOF must then significantly improve that QOZ real estate, and those improvements must be completed within 30 months.
For example, an investor would form a Kauai QOF LLC for the purpose of investing in Kauai QOZ real estate. The investor deposits capital gains from the sale of real estate, stocks, or from the sale of a business into that fund, and the fund purchases a $1.4 million Kukui’ula homesite located within the South Kauai QOZ. Within 30 months the fund improves the homesite by building a home at a cost of $1.4 million to meet the significant improvement test. Total investment: $2.8 million. The QOF’s business income required under the program is earned by renting the improved asset as a vacation rental home, as permitted under the County of Kauai zoning ordinances and the private Kukui’ula community rules.
The Carrot
My understanding is the tax owing on that $2.8 million in capital gains in my example is considered payable in 2027. However, under the Opportunity Zones program if the fund holds the QOF asset for 10 years or more 100% of the appreciation from its sale is tax free. The carrot.
In my example, if the Kukui’ula vacation rental home was held for 10 years, and then sold for say, $4.8 million, the $2 million appreciation is tax free, a significant advantage to the 1031 like-kind exchange scenerio.
Kukui’ula Homesite Availability
This Kukui’ula oceanview homesite is currently listed for $1,550,000. Located in the new Aepo Nei Neighborhood where 7-day vacation renting is permitted. 15,433 sq ft homesite area, 7,715 sq ft buildable area. Pad elevation: 157 ft. MLS 669283.
Kukui’ula private golf course, #14 hole
Kukui’ula private club
Kukui’ula private spa
Contact your tax specialist to determine how these tax incentives may possibly work for you.
Satori
July 6, 2023
Fabulous information. Thank you for sharing.